Will FOMC Chair Powell hint at more rate cuts today?
The Chinese yuan fell to its lowest level in eleven years against the US dollar on Wednesday, with investors selling the currency hard on concerns over an economic slowdown and a sharp decline in the domestic equity markets induced by the protests in Hong Kong.
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NY has been under heavy selling pressure following the deterioration in US-China trade talks, having been sent crashing below the 7 level to the USD earlier this month. The ongoing protests in Hong Kong have far from helped, causing investors to ditch the currency in favour of the safe-havens. The US dollar has, however, not benefitted as broadly as one would expect given the flight from risk, largely due to concerns over Federal Reserve monetary policy.

The FOMC released its meeting minutes last night from its July meeting. The language of the minutes suggested that the rate cut last month may be a one off, with ‘most’ policymakers deeming it as a ‘mid-cycle adjustment’ and not part of a full blown easing cycle. Some officials also raised concerns that the cut could send a negative signal regarding the health of the US economy.

That being said, as we mentioned yesterday a lot has happened in the past three weeks that may be enough to change their mind. FOMC Chair Jerome Powell will be speaking at the Jackson Hole conference today. We expect Powell to highlight these downside risks and leave the door firmly ajar to another rate cut in September. His language regarding additional cuts beyond September are likely to be key for the US dollar today. Should he downplay the need for aggressive easing, EUR/USD could make a beeline for the 1.10 level over the next few trading sessions.

Italian Prime Minister Conte resigns from post


A big test for the common currency this week will be this morning’s PMI data and European Central Bank accounts from its July meeting. Similarly to the Fed, the ECB accounts have a bit of a time lag and the information coming out of it may be seen as somewhat dated. Regardless, it will be interesting to see whether the bank gives any clues as to the possibility and potential size of additional stimulus, expected to be introduced at the next meeting in September. An undershooting in today’s PMI data would undoubtedly strengthen the already very strong case for an ECB rate cut next month.

Earlier on Wednesday, the euro edged modestly lower against its peers following the news that Giuseppe Conte had stood down as Italy’s Prime Minister. The lack of reaction in the currency markets was largely down to the fact that investors had widely expected his resignation following divisions within the Five-Star Movement and League coalition.

Merkel claims ‘backstop’ solution possible


Investors took very little heart from German Chancellor Angela Merkel’s comments on Wednesday that potentially opened the door to some form of amicable solution regarding the NI ‘backstop’, the key sticking point to Brexit.

On the topic of the backstop Merkel stated ‘it was said we will probably find a solution in two years. But we could also find one in the next 30 days, why not?’. There was, however, little reaction in the Pound, which has actually edged lower over the past 24 hours as investors remain pessimistic that any form of renegotiation will actually take place. It is unlikely that sterling traders will get too carried away until a more concrete solution to resolving the issue is actually on the table.
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